BRUSSELS (Reuters) - European Union regulators approved a British plan allowing bailed-out Royal Bank of Scotland <RBS.L> to support smaller alternative banks with funds totaling around 835 million pounds ($1.1 billion) to encourage competition.

The British government struck a deal with the European Commission in July for the plan, after RBS was unable to sell business banking unit Williams & Glyn and failed to meet one of the conditions of its 45 billion pound bailout.

The deal is significant for RBS as it ends the bank's state aid commitments which is considered a major milestone on its path to recovery as well as its ability to pay dividends again.

"The package targets a transfer of a 3 percent market share in the UK small- and medium-sized banking market from RBS to challenger banks," the EU competition enforcer said on Monday.